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IMF ups India growth forecast to 7.2% for current fiscal

Terming Indian economy a “bright spot” on the global economic landscape, IMF on Wednesday raised its growth forecast for the current fiscal to 7.2 percent, even as it called for steps to revitalise the investment cycle and accelerate structural reforms in the country.

In its annual assessment report for the country, the International Monetary Fund (IMF) also said India has emerged as one of the fastest-growing big emerging market economies
and the growth rate would further accelerate to 7.5 percent in the next fiscal, 2015-16.

The new forecasts have taken into account a revised methodology adopted by India earlier this year for calculating the GDP figures, about which IMF said that the country has “improved the way it measures economic output”.

The new methodology, however, has been termed as ‘puzzling’ initially by some including Chief Economic Advisor Arvind Subramanian and RBI Governor Raghuram Rajan. Incidentally, both Subramanian and Rajan have been with IMF in
the past.

Last year, IMF had forecasted a growth rate of 5.6 percent for the current fiscal, and 6.4 percent for the next. The Indian economy is reviving, helped by positive policy actions that have improved confidence and lower global oil prices, the IMF said, while anticipating stronger growth in the next fiscal on the back of stronger investment flows following improvements to the business climate.

To continue on this trend, India needs to revitalise the investment cycle and accelerate structural reforms, it said in its annual assessment report for the country. “Indian economy is the bright spot in global landscape, becoming one of the fastest-growing big emerging market economies in the world,” IMF said in a report after its recently concluded annual consultations with India.

“Growth numbers are now much higher and the current account deficit is comfortable, in part due to the fall in gold imports and lower oil prices,” IMF Mission Chief for India Paul Cashin said.

“New investment project announcements have started to pick up, particularly in the power and transport sectors,” he said, while adding that bolstering financial sector health and further financial inclusion would support growth going ahead. IMF said that the country is well placed to cope with external shocks, although there are possible risks on the
horizon, both external and domestic.

“Spillovers from weak global growth and global financial market volatility could be disruptive, including from any unexpected developments as the United States begins to raise its interest rates,” Cashin said.

On domestic front, the weaknesses in corporate balance sheets – especially in light of the increase in corporate leverage of the past few years – and worsening bank asset quality bear watching, as they could weigh on growth.

IMF said that India’s economic profile has got a lift as the country improved the way it measures economic output, as the revised national accounts series incorporates numerous
conceptual and methodological improvements that make them more consistent with international best practices.

“The revised growth figures support our view that economic recovery in India is under way, albeit pointing to a somewhat faster pace than we, and others, previously believed. These GDP revisions portray a more resilient performance of the services and manufacturing sectors of the economy,” Cashin said.

In a related statement, the IMF Executive Board said that India’s vulnerabilities have receded more than those of most emerging markets and sentiment has been revived. “India’s near-term growth outlook has improved, and the balance of risks is now more favourable, helped by increased political certainty, several positive policy actions, improved business confidence, and reduced external vulnerabilities,” it

Despite a decline in India’s external imbalances and strengthening of buffers, the spillover impact from global financial market volatility to India could be very disruptive, including from any unexpected developments in the course of US monetary policy normalisation, particularly against the backdrop of recent large capital inflows, it added. 

External risks also emanate from a prolonged period of weak global growth, which could dampen Indian exports. Domestic risks include a supply-driven spike in inflation, further deterioration in bank asset quality and continued stress in corporate financial positions, as well as slower-than-expected progress in addressing supply-side bottlenecks, which could weigh on growth and stoke inflation.

The Board also lauded the Indian government’s “comprehensive policy initiatives”, saying these have helped reduce India’s external vulnerabilities and improve the
economic outlook.

These initiatives include recent policy measures to revive investment, reduce inflation, consolidate the fiscal position, and improve the ease of doing business, it added. Directors, however, observed that significant external and domestic risks remain there, while room for countercyclical macroeconomic policy support is limited by still-high fiscal deficits and upside risks to inflation.

The IMF Board said that the main external risk facing India is a surge in global financial market volatility. If external pressures re-emerge, rupee flexibility should be an important shock-absorber, along with “judicious foreign exchange intervention, tightening of monetary conditions, and additional fiscal adjustment”. 

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